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1987 – Office Space

AMB invested in office buildings in the mid-1980s, but shifted to industrial properties and shopping centers when its research indicated the market for office buildings was slowing down.

In early 1987, the real estate sector was booming, with office buildings rising at an astounding rate, while valuations climbed right along with them.

But Prologis legacy company AMB had doubts about how long the upturn might last. Since its founding in 1983, the young company had built a reputation for digging deeper into research and statistics than its competitors. As it examined data about the state of office construction in the United States, it didn’t like what it was seeing.

It wasn’t easy for any investment company—let alone a small 12-member firm—to go to its investors with dire warnings about the future of the economy.

From the mid-1970s to mid-1980s, three unique demographic shifts occurred, fueling the need for more office space: shift from blue collar to white collar jobs; a swath of baby boomers had come of age, seeking office jobs; and a new generation of women joined the labor force.

By 1987, however, research indicated that those trends had lost momentum and were either leveling off or reversing course.

In many ways, what remained was a simple matter of supply outstripping demand. The recent development boom had doubled the nation’s available office space. Demand was beginning to dwindle, even though some investors continued to seek inflated prices for developing trophy-asset office spaces.

For AMB, it was a particularly sobering finding. At the time, most of the company’s investments were in office buildings, with much of its revenue accrued through the ongoing management of those assets. By telling its investors to move their money out of office buildings, they were putting AMB’s future at risk. It was a courageous move.

But the numbers didn’t lie, nor did the stock market’s plunge on Black Monday: Oct. 19, 1987. AMB sought safer ground, adopting what it affectionately called its “dingbat” investment strategy. The plan targeted industrial real estate space and neighborhood shopping centers—two real estate sectors that AMB believed would continue to grow, even during a downturn.

Many of AMB’s clients followed the firm’s advice, shifting their money into industrial and shopping center properties and enjoying solid returns, while others who stayed with office space felt the blow when the bubble burst.

“I think there are a lot of organizations that see a change coming in the environment but stick their head in the sand, thinking it’s all going to pass over and life is going to be good again,” said Prologis Chairman & CEO Hamid Moghadam. “We didn’t do that. We changed the course of our business away from offices and moved toward people who shared our view of the world and how it was changing.”